Loan Modification

FHA Loss Predictions 50% Too High

By Peter G. Miller

If you were running the FHA loan program and wanted to make sure it stays solvent one of the first things you need to do is to figure out how many loans will fail. Sorry, but claims against any insurance fund are a fact of life and that includes the FHA.

So for fiscal 2010, the government accounting period that ended September 30th, the government figured that 837,842 FHA borrowers would fail. That’s a huge number and evidence of great human anguish, but with the housing markets beat up in many places that was the FHA estimate.

The FHA was wrong — a happy event for everyone.

It turns out that the actual number of termination and claim losses amounted to 430,516. That’s still a big number in normal times and it still means that a lot of households have been hurt during the current economic crunch. But the final figures are also 49 percent lower than the original prediction.

This is important stuff. Here’s why:

When an insurance program — which is what the FHA loan program is — has fewer claims it means there is more ability to make future claims. That means there should be greater confidence in the FHA program by lenders — the people who benefit from FHA insurance coverage when something goes wrong.

Last year there has been worries that FHA reserves would drop by some $5 billion. FHA critics, of course, yelled and screamed that taxpayer money would be needed to bail out the program — as if stimulating the housing market would be a bad thing when compared, say, to bailing out a bank here and there.

In fact, what happened was completely different.

Total capital resources available to the FHA went from $31.8 billion at the end of fiscal 2009 to $33.3 billion at the end of fiscal 2010. Even without advanced math it’s fairly obvious that the FHA did not lose billions of dollars, in fact it didn’t lose anything. Reserves rose. If this was a private company we might think in terms of increased profits and retained earnings.

This is important because it means the changes the FHA undertook to refine the program have succeeded. Earlier this year the up-front FHA mortgage insurance premium fell from 2.25 percent to 1.00 percent while the annual mortgage insurance increased from .55 to as much as .90 percent.

For borrowers you want the FHA to succeed because a healthy reserve system means there’s no reason to justify increased insurance premiums.

No less important, as private-sector lenders use funny-money accounting to record “profits” by ignoring reduced asset values the FHA has generated real income while paying out all claims. That’s exactly what a well-run insurance program ought to be doing — and something many big-name lenders have been unable to duplicate.

In the future we will see more and more private-sector lenders getting FHA-like results. Why? Because the new mortgage standards required under the Wall Street Reform Act — the bill lenders want to revoke — essentially demand that lenders follow many FHA guidelines.

Full post as published by FHA Mortgage Guide on November 10, 2010 (boomark / email).